January 26, 2017 / 5:53 PM / 3 years ago

Moody's puts Novartis on notice over debt-funded buyback plan

ZURICH, Jan 26 (Reuters) - Moody’s cut Novartis’s debt rating outlook on Thursday to negative from stable, saying the Swiss drugmaker’s borrowing capacity would be weakened by its debt-financed share buyback at a time of stagnating sales.

While affirming Novartis’ Aa3 long-term ratings, Moody’s analysts wrote the proposed buyback “puts further strain on the company’s credit metrics, which were already weak for the Aa3 rating category prior to the announcement”.

“The buyback is well in excess of the company’s free cash flow ... and will weaken the company’s credit metrics over the next 12 months during a period where the company expects sales to be broadly in line with 2016,” wrote analyst Knut Slatten.

On Wednesday, Novartis finance chief Harry Kirsch acknowledged that any bolt-on acquisitions approaching the $5 billion limit flagged by Chief Executive Joe Jimenez would force Novartis to issue new debt, just like with the buyback.

But Kirsch was confident in Novartis’s financial muscle.

“Credit ratings we leave to credit rating agencies, but we have, even with this additional leverage, a very strong balance sheet,” he said.

Still, Moody’s cautioned that any “debt-funded acquisitions towards the upper end of the targeted range could prove negative for the rating unless mitigated by the company’s financial policies.”

Novartis does have an ace up its sleeve: The big $13 billion stake in cross-town rival Roche that Novartis has said it could sell, should an appropriate buyer emerge.

Moody’s said unloading assets would buy breathing room, provided Novartis directs proceeds to debt reduction rather than shareholder returns. (Reporting by John Miller; Editing by Mark Potter)

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